Introduction
The Goods and Service Tax (GST), introduced in 2017 in India, aims at structuring the indirect tax system by bringing multiple taxes under one umbrella. The Reverse Charge Mechanism (RCM) is a new concept, which puts the onus of liability to pay tax on the recipient (buyer), whereas in ordinary cases it lies with the supplier. This mechanism brings the unregulated sectors into the tax net, playing a crucial role in ensuring better compliance.
The supplier of goods or services, in the ordinary scenario, is obligated to collect and deposit GST. However, under the Reverse Charge Mechanism (RCM), it is the recipient who is liable to pay the tax directly to the government. This reversal of responsibility is used in certain cases to keep track of taxable activities and minimize tax evasion.
Legal Framework
The Reverse Charge Mechanism is defined under the Central Goods and Services Tax (CGST) Act, 2017, and the Integrated Goods and Services Tax (IGST) Act, 2017.
Key statutory provisions include:
- Section 9(3) of the CGST Act: GST shall be payable by the recipient in respect of certain notified goods and services.
- Section 9(4) of the CGST Act: RCM may apply (only for specific notified categories) if a registered person receives goods or services from an unregistered person.
- Section 5(3) and 5(4) of the IGST Act: These provisions are mirror those in the CGST Act for inter-state supplies.
The government, through notifications, specifies the nature of goods or services and the categories of persons liable under RCM.
Objectives of RCM
In the context of tax administration, the RCM serves multiple purposes:
- Widening the tax base by covering sectors with historically low compliance.
- Ensuring tax collection from recipients who are easier to monitor.
- Facilitating the collection of tax on imports and transactions with unregistered suppliers.
- Strengthening the tracking of e-commerce and inter-state transactions.
This mechanism is particularly beneficial in regulating transactions that involve small or unregistered suppliers, thus plugging revenue leakages into the supply chain.
Types of RCM under GST
The RCM under GST can typically be classified into three categories:
1. Notified Goods or Services under Section 9(3) of the CGST Act:
These refer to specified goods or services for which the government, through official notifications, has shifted the tax burden to the recipient.
2. Supplies by Unregistered Persons under Section 9(4) of the CGST Act:
This provision was initially applicable to all such transactions but was later restricted to specific notified cases, primarily involving government departments or other specific sectors.
3. Import of Services under Section 5(3) of the IGST Act:
A registered person is liable to pay GST under RCM when importing services for business purposes.
Examples of RCM Applicability
The Reverse Charge Mechanism (RCM) applies to various goods and services. Some practical examples are provided below for better understanding:
✦ Goods covered under RCM [Notified under Section 9(3)]:
- Cashew nuts (not shelled or peeled).
- Leaves used for wrapping bidis.
- Used vehicles sold by government departments to registered persons.
- Raw cotton purchased by cooperatives from agriculturists.
✦ Services covered under RCM [Notified under Section 9(3)]:
- Legal services received by any business entity from an advocate or a law firm.
- Transportation services provided by a Goods Transport Agency (GTA).
- Services provided by a director to a company (excluding services treated as salary).
- Sponsorship services received by a company.
- Renting immovable property by any government authority to a registered business.
- Security services provided by a security agency to a registered person.
Compliance Requirements under RCM
Several legal obligations and documentation requirements must be met to comply with the Reverse Charge Mechanism (RCM):
- A self-invoice must be issued by the recipient when receiving supplies from an unregistered supplier, as the supplier is not authorized to issue a tax invoice.
- GST under RCM must be paid in cash and cannot be adjusted through ITC.
- If the supply is used for business purposes, the tax paid under RCM can be claimed as ITC in the same month.
- Details of RCM transactions must be disclosed under the appropriate heads in GSTR-1 and GSTR-3B.
- Businesses must maintain proper records of such transactions for audit and verification purposes.
Reverse Charge and Input Tax Credit (ITC)
One significant relief for businesses liable to pay tax under the RCM is the eligibility to claim Input Tax Credit (ITC), subject to the following conditions:
- The recipient must be a registered taxpayer under GST.
- The goods or services received must be used exclusively for taxable business purposes.
- The tax must have been actually paid to the government before claiming the credit.
However, ITC cannot be claimed on supplies used for personal consumption or for exempted or non-taxable supplies.
RCM in E-commerce Transactions
A special provision under Section 9(5) of CGST Act applies to certain services provided through e-commerce platforms. In these cases, the e-commerce operator becomes liable to pay GST in place of the actual supplier, under the Reverse Charge Mechanism.
Examples of such services include:
- Passenger transportation services provided by cab aggregators such as Ola and Uber.
- Accommodation services booked through online portals.
- Restaurant services supplied through food delivery platforms such as Swiggy and Zomato particularly when provided by unregistered restaurants.
In such cases, the e-commerce platform is responsible for depositing the applicable GST under the reverse charge mechanism, instead of the individual service provider.
RCM vs. Forward Charge – A Quick Comparison
| Particulars | Forward Charge | Reverse Charge |
| Time of Supply | Invoice issuance based. | Payment date or invoice date based. |
| Invoice Issuance | By supplier | By recipient (self-invoice, if needed) |
| Input Tax Credit | Available to recipient | Available to recipient after tax |
| Applicable to | Most Transactions | Specific notified transactions |
| Responsibility to pay GST | Supplier | Recipient |
Recent Developments and Amendments
RCM provisions have evolved over time based on industry feedback and compliance concerns:
- Section 9(4) was previously very broad but was amended in 2018 to limit its scope to specific notified transactions.
- New notifications and circulars are frequently issued to add or remove goods/services from the RCM list.
- The government has clarified that RCM is not applicable to exempted supplies or where the supplier is registered and charges GST under forward charge.
- The businesses must stay updated with GST notifications to avoid non-compliance or interest/penalty under Sections 73 or 74 of the CGST Act.
Conclusion
The Reverse Charge Mechanism under GST reflects the government’s intent to secure extensive tax coverage, especially in areas where tracing the supplier might be difficult. It strengthens compliance by shifting the burden of tax payment from suppliers to registered recipients who are more equipped with handling documentation and accounting.
RCM, while adding an extra layer of responsibility for businesses, it also offers them the ability to claim ITC this way contributing to a cleaner tax ecosystem. RCM continues to play a major role in India’s evolving tax regime, with regular updates and clear rules.
Author: Somya Kataria, Student at Amity University Madhya Pradesh
Link to similar articles: https://jpassociates.co.in/gst-compliance-july-2025/
Link to GST portal: https://www.gst.gov.in
